2008 global financial crisis
Lehman Brothers’ collapse led to the mother of all modern recessions — until now
the time.
Like that attack a few years earlier, the GFC had its “ground zero” in New York. The “masters of the universe” on Wall Street had recovered from the blips of the Al-Qaeda attacks and the dot-com bust, and had piles of other people’s capital to put to invest. The American dream — a home, a couple of cars, maybe even a boat somewhere — was within reach. All bought on credit. And Wall Street had come up with a revolutionary method of financing.
All that credit could be bundled into “collateralized debt obligation” (CDO) and sold as investable instruments that could be traded among the big firms, which were, of course, “too big to fail.”
But by the summer of 2007, what was termed the “subprime” mortgage market was in serious trouble. The loans bundled together in CDOs were worth only as much as the most toxic mortgage in the basket.
The first sign that this was anything more than a threat to the US property market came when Merrill Lynch, one of Wall Street’s “blue blood” banks, suffered a shocking $5.5 billion loss.
The stock market caught the contagion, with shares prices falling 50 percent over a few months. The “mom and pop” businesses of Main Street
USA found their capital and pensions wiped out in a Wall Street bloodbath. A financial nadir was reached when Lehman
Brothers, a 150-year-old pillar of the US financial system, filed for bankruptcy. Despite the hundreds of billions of dollars US federal authorities had spent on propping up the system, it turns out nobody was too big to fail.
The global financial system was dangerously close to freezing up altogether, with credit increasingly difficult to obtain. Massive government intervention, not least at the emergency G20 meetings in 2008 and 2009, kept the wheels just about moving.
But the global economy was feeling the shock, and with it the Middle East, which had survived the credit crisis relatively well, thanks mainly to government austerity measures and big financial reserves. Vital oil prices rose quickly as the global economic situation improved on the back of an economic stimulus package by China.
The regional exception was Dubai. With minimal oil reserves, its exuberant growth had been fueled by debt and, by late 2009, it found it could not service many of those liabilities. Dubai World, one of the government companies at the forefront of extravagant projects such as the Palm Jumeirah, told creditors it was seeking a “standstill” on debt repayments while it renegotiated its loans.
The year-long negotiations were fraught, but in the end Dubai’s creditors stood by it, as did the oil-rich government of Abu Dhabi, which provided $20 billion as a life-saving act of fraternal support. “Standing still, but still standing” was how The Economist magazine described it.
But in many ways, the Dubai experience encapsulates the global situation since the GFC, and explains why the current crisis could get even more serious. The emirate has restructured and extended its debts, even repaid some, while taking out others. Dubai’s aggregate level of indebtedness is still roughly the same as it was in 2010, according to the IMF.
The world has also continued its debt spree. Total global indebtedness is estimated at $250 trillion, three times what it was in 2008. The IMF in its most recent forecast said that the economic effects of the pandemic crisis could be the worst since the 1930s Depression.
Apart from the debt factor, the coronavirus crisis is different from the GFC in other ways, none of them encouraging. There is the immediate threat to life, of course, and the worry that China does not have the capacity to pull off another rescue act. There is also the fear that global institutions are not as capable now as they were in 2008 of adopting effective measures to avert catastrophe.
“The world economy is now collapsing,” ran a headline in the Financial Times recently. Sorkin will have to consult the superlatives dictionary for his next book.
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